CAN THE ISSUING BANK REFUSE TO HONOUR THE CONFIRMING BANK IF IT FINDS DISCREPANCIES?

Executive Abstract

This article examines whether an issuing bank may refuse to reimburse a confirming bank after the confirming bank has declared a presentation compliant. Where the issuing bank determines that the documents contain discrepancies and issues a refusal before reimbursement becomes due, Article 16(a) of UCP 600 permits refusal. The confirming bank’s declaration of compliance does not eliminate the issuing bank’s independent right of examination.

In documentary credit practice, tension can arise when a confirming bank has already declared a presentation compliant, yet the issuing bank later finds discrepancies.

So the essential question is:

If the confirming bank has sent its SWIFT stating that compliant documents were remitted, is the issuing bank still entitled to refuse?

The Scenario

An issuing bank issues a letter of credit which is confirmed by a nominated bank.

Field 78 states that payment to the confirming bank will be effected four banking days after receipt of the confirming bank’s SWIFT confirming that fully complying documents have been remitted.

The confirming bank sends the required SWIFT.
Payment is due on 12 February.

The documents are received by the issuing bank on 10 February.
Examination is completed on 11 February.

The issuing bank determines that the presentation contains discrepancies and sends a notice of refusal in accordance with Article 16 before the reimbursement due date.

The confirming bank argues that once its SWIFT was sent, payment became due and discrepancies should not delay reimbursement.

Was the issuing bank entitled to refuse?

The Legal Position

Article 16(a) provides that when an issuing bank determines that a presentation does not comply, it may refuse to honour.

In this case, the issuing bank:

• Received the documents before the reimbursement due date,
• Completed examination within the allowed period,
• Issued a refusal before payment became due.

Accordingly, it acted within its rights under Article 16.

Why Timing Is Decisive

The decisive element is not the confirming bank’s SWIFT declaration.
The decisive element is whether the issuing bank determined non-compliance and issued refusal before reimbursement became due.

Here:

• Reimbursement due date: 12 February
• Examination completed: 11 February
• Refusal sent: 11 February

The issuing bank acted in time.

Therefore, it was entitled to refuse.

What If Reimbursement Had Already Been Made?

Even in a situation where reimbursement had already been effected based on the confirming bank’s SWIFT advice, the confirming bank would be required to return the funds if the issuing bank subsequently determines that valid discrepancies exist and refuses the presentation in accordance with UCP 600.

The confirming bank’s statement of compliance does not deprive the issuing bank of its right to examine and determine compliance independently.

Conclusion

The issuing bank was within its rights to refuse.

It completed examination within the time allowed under UCP 600, determined that the presentation was not compliant, and issued a notice of refusal before reimbursement became due to the confirming bank.

The confirming bank’s SWIFT advice declaring compliance does not eliminate the issuing bank’s independent right of examination. Compliance is established through examination in accordance with the rules — and where refusal is issued in time, the issuing bank’s position is legally sound.

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Mr. Old Man